Economists call for reform in Vietnam's currency management

03:29 PM @ Wednesday - 09 July, 2014
Vietnam's Central Bank should implement a crawling peg exchange rate, but should maintain its band on the dollar trade to prevent speculation and maintain stability in its forex market, economists said.

The Dong should be gradually adjusted multiple times in a year, instead of dramatically devalued and then kept unchanged for long stretches of time, said economist To Trung Thanh in his recent report to the National Assembly’s Economic Commission.

Under the current policy, speculation could threaten the stability of the forex market, especially given Vietnam's need to devalue the dong to support exports and lower inflationary pressures, he wrote in the report, entitled “Economic Institutional Reform: Key to Restructuring.”

These long stretches without fluctuation in the exchange rate increase the risk of significant devaluation when the economy dips or interest rates decrease, Thanh said.

The leader of a joint-stock commercial bank in Hanoi said a gradual adjustment regime would cure the country of its anxiety about dramatic dips in the value of the Dong, which could put pressure on the exchange rate.

Black market dollar prices increased sharply -- much higher than officially reported at commercial banks -- when rumors of a coming exchange rate adjustment swirled at the end of last year and the early part of this year.

Do Duy Thai, general director of HCMC-based construction steel producer Thep Viet, said the crawling peg exchange rate adjustment could help firm avoid risks in implementing export and import contracts at different times.

Instead of depreciating the Dong by a whole percent point once a year, the central bank should stagger the devaluations over two or three adjustments, he suggested.

The central bank set its exchange rate for US dollars at VND20,828 in early 2012, before raising the rate by 1 percent to VND21,036 in June 2013, and VND21,246 last month.

The biggest devaluation in recent years came when the Dong dropped 8.5 percent against the dollar February 11, 2011 to counter a widening gap between official and black market rates.

Economist To Trung Thanh suggested that the one-percent exchange rate band should be loosened to increase exchange rate flexibility. Dollar/dong transactions now can take place within 1 percent of the daily rate set by the central bank.

Disagreeing with him, economist Nguyen Tri Hieu said the move isn't suitable given that tensions in the East Sea have prompted many businesses and people to invest in dollars.

Echoing Hieu, Senior Advisor to the state-owned Bank for Investment and Development of Vietnam Can Van Luc said commercial banks seldom set exchange rates at the band ceiling.

For this reason, he argued, it's unnecessary to loosen the band now.

Thanh said that Vietnam should not let exports alone dictate its economic policy, given that the degree to which imported materials and equipment are critical to Vietnam's manufacturing industry.

Such a policy won't encourage the development of local supporting industries, Thanh said.

Central Bank Governor Nguyen Van Binh said the institution plans to weaken the dong by as much as 2 percent in 2014.

Dao Quoc Tinh, deputy chief inspector of the Central Bank, said Vietnam now has foreign currency reserves of more than US$36 billion – a record figure.

“With such large reserves, I can affirm that the foreign exchange market remains stable due to the central bank governor’s commitment,” Tinh told Thoi bao Kinh te Saigon.

Floating exchange rate

In his recent report to the National Assembly, Thanh said that Vietnam should move toward a floating exchange rate as it continues to ease restrictions on capital flows across the country’s borders.

He anticipates that this shift will only accelerate in the next four years as the country strives to meet its international commitments and will naturally force the exchange rate to be regulated by the market.

Vietnam should embrace this shift given that the country currently suffers from low competitiveness among local financial institutes and ineffective financial surveillance mechanisms, Thanh said.

Economist Hieu said the floating exchange rate should be implemented once Vietnam sees inflation hike of some 3 percent, and GDP growth of 5 percent upwards. In the situation, the dong value is rather stable, he explained.

Thanh also suggests Vietnam to use more foreign currencies in international payments to avoid large impacts caused by changes in the world monetary market, and prevent risks in international trade.

The country now clings to the greenback, while its exports and loans are valued by not only the dollar, but also the Japanese Yen and the Euro, he said.

The government is trying to bolster an economy that the World Bank estimates will expand 5.4 percent this year.

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